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CHAPTER 15
Fiscal Policy
SECTION 1: Defining Fiscal Policy
SECTION 2: Fiscal Policy Strategies
SECTION 3: Fiscal Policy and
the Federal Budget
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SECTION 1
Defining Fiscal Policy
Objectives:
 What role do taxes play in fiscal policy?
 What kinds of tax rates do governments set?
 Which taxes are the most profitable?
2
SECTION 1
Defining Fiscal Policy
Role taxes play in fiscal policy:
 fund government programs
 influence individuals’ behavior
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SECTION 1
Defining Fiscal Policy
Types of tax rates:
 proportional
 progressive
 regressive
4
SECTION 1
Defining Fiscal Policy
Most profitable taxes:
 individual income
taxes
 corporate income
taxes
 Social Security taxes
 property taxes
 sales taxes
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2006 IRS Collections Data
Number of
Returns
AG
Income
(millions)
Income
Taxes
Paid
(millions)
135,719,000
$8,122,040
$1,023,739
100%
100%
12.6%
(NA)
Top 1%
1,357,000
$1,791.87
$408,369
22.06%
39.89%
22.79%
$388,806
Top 5%
6,786,000
$2,977,714
$615,680
36.66%
60.14%
20.68%
$153,542
Top 10%
13,571,000
$3,843,144
$724,740
47.32%
70.79%
18.86%
$108,904
Top 25%
33,930,000
$5,535,830
$883,153
68.16%
86.27%
15.95%
$62,068
Top 50%
67,860,000
$7,105,599
$993,176
87.49%
97.01%
13.98%
$30,881
Bottom
50
%
67,860,000
$1,016,441
$30,563
12.51%
2.99%
* 3.01%
(NA)
All
Taxpayer
s
Group's %
Share of
Total AGI
* The average tax rate for the bottom 50% is drawn from a related IRS spreadsheet.
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Group's %
Share of
Total Taxes
Group's
Avg. Tax
Rate (%)
Income
Floor for
Group
SECTION 2
Fiscal Policy Strategies
Objectives:
 How do supply-side and demand-side
theories differ?
 What are the chief tools of fiscal policy?
 What factors limit the success of fiscal
policy?
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SECTION 2
Fiscal Policy Strategies
Differences between supply-side and
demand-side theories
 Supply-side economics:
 focuses on achieving economic growth and stability by
increasing product supplies
 calls for limited government economic involvement
 Demand-side economics:
 focuses on achieving economic growth and stability by
increasing aggregate demand
 calls for active government economic involvement
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SECTION 2
Fiscal Policy Strategies
Tools of fiscal policy:





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marginal tax rates
tax incentives
government spending
public transfer payments
progressive income taxes
SECTION 2
Fiscal Policy Strategies
Limitations of fiscal policy:




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timing problems
political pressures
unpredictable economic behaviors
lack of coordination among government
policies
SECTION 3
Fiscal Policy and the Federal Budget
Objectives:
 How is the federal budget developed?
 What role does deficit spending play in the
U.S. economy?
 What methods can the government use to
balance the federal budget?
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2006 Federal Budget
12
SECTION 3
Fiscal Policy and the Federal Budget
Steps in the development of the
federal budget:
1. prepared by the president, who consults with
the OMB, the Council of Economic
Advisers, the Department of Treasury, and
other presidential advisers
2. analyzed, amended, and approved by
Congress
3. signed or vetoed by president
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SECTION 3
Fiscal Policy and the Federal Budget
Role of deficit spending in the U.S.
economy:
 provides economic support during national
emergencies
 provides social programs
 stimulates the economy during recessions
 promotes citizens’ economic well-being
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SECTION 3
Fiscal Policy and the Federal Budget
Possible methods to balance the
federal budget:
 increase revenues
 decrease expenditures
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CHAPTER 15
Wrap-Up
1. Explain why federal, state, and local governments
collect taxes, and provide an example of each of the
following: proportional tax, progressive tax,
regressive tax.
2. How did John Maynard Keynes influence economic
thought?
3. What tools do lawmakers use to enact fiscal policy?
4. Describe the process of developing and approving
the federal budget,
5. What actions might the government take to balance
the federal budget?
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